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Mar 26, 2020

TSX flirts with bull market in 'welcome relief rally' after crash

Stocks rising, but too early to sound the all-clear signal: RBC Capital Markets


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The S&P/TSX Composite Index managed to string together a third straight day of gains Thursday, but fell just short of closing in bull market territory.

Earlier in the session, the index rose more than 20 per cent from the depths it crashed to earlier this week amid the COVID-19 global health crisis.

The benchmark index closed 1.77 per cent higher Thursday, after jumping as much as 3.45 per cent in morning trading, and is into its longest winning streak since Feb. 20 when it closed at a record of 17,944.06. 

Over a three-day span through the end of trading Thursday, only two members of the index — Cargojet Inc. and Fronterra Energy Corp. — are in the red.

"Indeed, this has been a welcome relief rally for investors," said Andrew Pyle, senior wealth advisor and portfolio manager for The Pyle Group at Scotia Wealth Management. "Personally, I would prefer to see less magnitudes in the swings, as this would be more constructive in helping develop a base, if indeed we are forming one."

As of Thursday's closing bell, the TSX leaders board since the end of trading Monday included names like Chorus Aviation Inc. (+84.8 per cent), Lightspeed POS Inc. (+81.7 per cent), and Hexo Corp. (+59.8 per cent).

As dramatic as the moves have been over the last couple of days, the TSX faces a steep uphill climb to fully rebound from the recent crash: The index is still down 25.5 per cent from the Feb. 20 record.

"This is not the time to be a hero and blindly buy all of the beat-up cyclicals."

- Brian Madden, senior vice-president and portfolio manager, Goodreid Investment Counsel

BNN Bloomberg reached out to some Bay Street investment professionals for their perspective on the TSX's sudden surge. Here's some of what they told us via email.

Andrew Pyle, senior wealth advisor and portfolio manager, The Pyle Group, Scotia Wealth Management:

"One risk is that with the attention shifting away from fiscal stimulus, we are going to get back to dismal economic reports and the virus. On the former, we should be doing a good job in pre-educating investors of these numbers and putting them in perspective; however, there is no such pre-educating on the virus. If containment and social distancing does not produce a curve which shows [COVID-19] is resolved by the summer, then economists are going to take two-quarter recession forecasts and turn them into one-year [forecasts]. In that case, this would not be a bottom."

Karl Berger, senior wealth consultant and director, Cidel Asset Management:

"I don’t think anyone should get too enamoured with short term moves - up or down - because we’re simply in a completely uncertain period of time. For the TSX to have been down 37 per cent at one point implies a level of concern over future prospects we don’t feel is justified based on fundamentals, while completely acknowledging that we really don’t know what those fundamentals will look like in the short-to-medium term.

"We have been buying, in particular in terms of switching clients out of bonds and into equities (and we aren’t finished yet, but will take a breather during this rally). Three days ago, you could sell the ten-year bond of a blue chip Canadian company and forgo a 3.2 per cent yield, buy their common stock at a six per cent yield and almost double your cash flow. That’s a trade I would do any day of the week."

Brian Madden, senior vice-president and portfolio manager, Goodreid Investment Counsel:

"I don’t think we’re out of the woods yet, and likely won’t be until we see some abatement in the health risk. As for the markets, we’re hopeful that the raw fear and panic phase may be abating, but it’s not unusual for markets to make an initial low, followed by a sharp rally and then retrace much of the rally over the coming days and weeks.

"Trying to pick a precise bottom is a fool’s game, but we like the prices we’re seeing across a lot of stocks today and think intrinsic values, which stock prices follow in the long term, are higher than current prices. With that said, my colleague Gordon Reid, who manages our U.S. equity mandates, added a large bank to portfolios yesterday, and we’re sizing up a few names for purchase in Canada as well, with the unifying themes among all of them being quality, industry leadership/competitive advantage and financial strength. This is not the time to be a hero and blindly buy all of the beat-up cyclicals."

Bryden Teich, portfolio manager, Avenue Investment Management:

"Whenever the market experiences violent moves downward, it is normal to expect days or weeks where the market bounces higher as new buyers re-enter the market. Over the past few weeks, countries around the world have taken unprecedented steps to shut down economies to halt the spread of the virus. It is uncertain how long the economic damage will last, so we are not changing our longer-term view and process based on any given day or week.

"Our strategy has been to be buyers of stocks we like on really horrible days in the markets, and on days where the market rallies we have lightened up on non-core positions. The Federal Reserve has taken unprecedented steps over the last two weeks to aid with the carnage in the bond market. But the Federal Reserve can’t stop an underlying recession by printing money. There is a corporate debt bubble that is unwinding in the United States which will take months and quarters to work its way through the system. It's important that investors stay cautious out there and not get too emotional over individual day-to-day swings. This is going to take time to work its way to the other side of the valley."

- with files from BNN Bloomberg's Robert Graham

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